Europe’s galloping crisis

Italy named an unelected technocrat as prime minister this week, as Greece did last week, in hopes of convincing markets that deep economic reforms were finally underway to stem Europe’s debt crisis. The selection of Mario Monti in Italy and Lucas Papademos in Greece, both economists with international experience, was initially greeted with cautious optimism. (See Business, Extras, Issue of the week.) But when new data were released suggesting that the eurozone’s economy could be headed for recession, Italy’s borrowing costs rose again to an unsustainable 7 percent. More ominously, bond rates were also rising for Austria, the Netherlands, Finland, and France—countries once considered safe from the crisis.

The eurozone mess is escalating dangerously, said The Economist, and it’s time to act. Italy suffers more from a lack of market confidence than insolvency; its debt, “though high, is stable.” The European Central Bank must relieve the pressure by buying lots of Italian debt, despite Germany’s worries that such action would allow Italy—and others in the future—to avoid enacting painful measures like tax hikes and pension reforms.

Whatever the Europeans do, they need to act fast before this crisis jumps the Atlantic, said Rana Foroohar in Time. We might have coped with a Greek default, but the fall of Italy, the world’s eighth-largest economy, would be devastating for the U.S. Not only are Italy’s biggest companies “likely held by your pension fund,” but U.S. banks own or are exposed to “a good chunk of Italian debt.” Italy’s default would lead to a bigger credit crunch than the fall of Lehman Brothers did, and a “global financial crisis that could tank the world economy.”

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“A crisis in small peripheral countries has become a conflagration,” said Martin Wolf in the Financial Times. With borrowing costs now soaring even in the heart of the continent, EU leaders are facing perhaps their ��last chance to put out the fire.” Let’s hope they finally grasp that European unity, the global banking system, and the world economy depend on their next steps.